When a buyer signs up for a construction contract, there are two primary types of pricing models that the contract can follow. The fixed cost model gives a price upfront, taking into account an estimated cost of material and labor before the job begins. A cost plus pricing model does not establish a price prior to construction, requiring that the buyer cover the cost (whatever that may be) plus a set percentage profit upon completion.
The Pitfalls of Cost Plus Pricing
Cost plus pricing is a controversial method in the construction industry. Many firms resort to a cost plus contract because they do not have the experience or ability to accurately estimate the cost of a particular job. In inexperienced hands, this kind of contract can lead to unexpectedly high costs for contractors and disturbingly high prices for customers.
If a contractor does offer a cost plus contract, it is essential that the contract include a “not to exceed” clause, which sets a limit on the project cost. In the event of excessive costs over the established limit, a customer is not required to pay for the work. Contractors with little experience in estimating costs run the risk of exceeding the limit, resulting in legal ramifications.
Legally, cost plus contracts are complicated and ambiguous. Many lawyers define cost plus pricing in different terms and there are a number of legal sensitivities that could invalidate contracts between customers and contractors. This means that contractors have to keep detailed logs and have regular meetings with customers in order to protect themselves from liability.
The definition of “costs” is also arguable. There may be situations where it is not clear who should foot the bill – the customer or the contractor. Combined, numerous small details and legal requirements related to cost plus contracts can bog down the construction process.
While a cost plus pricing method may seem logical at first glance, a closer look at the process proves that it is not the best approach to contracting.
Fixed Cost Pricing – the Solution
With fixed cost pricing, the contractor and the customer examine everything that is to be done during the construction period. The contractor then establishes a pre-determined price based on the contractor’s expert estimation of cost of materials and labor. Regardless of the end cost to the contractor, the agreed upon price will not change, excluding exceptional cases detailed in the contract.
Any variable work that cannot be concretely established at the time the contract is drawn up can be assigned an allowance that the contractor must work within. If the customer would like to add further construction in these areas, the allowance can be increased as both parties agree.
There is typically a clause that outlines items that can arise due to construction that cannot be examined prior to the start of the project, such as termite damage, mold, moisture infiltration and electrical or plumbing code issues.
EXOVATIONS – a Certified Contractor
EXOVATIONS is a certified contractor with 18 years of installation and remodeling experience. Our process is designed to satisfy our customers. To us, that means working with efficiency and skill with a commitment to transparent, helpful communication with our clients. We use fixed cost contracts because we are confident in our experience and ability to meet and exceed our customers’ expectations.
To learn more about our expert remodeling or installation in Georgia, please contact us.